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Shut Out: How Land-Use Regulations Hurt the Poor

Thursday, February 5, 2015

People sometimes support regulations, often with the best of intentions, but these wind up creating outcomes they don’t like. Land-use regulations are a prime example.

My colleague Emily Washington and I are reviewing the literature on how land-use regulations disproportionately raise the cost of real estate for the poor. I’d like to share a few of our findings with you.

Zoning

One kind of regulation that was actually intended to harm the poor, and especially poor minorities, was zoning. The ostensible reason for zoning was to address unhealthy conditions in cities by functionally separating land uses, which is called “exclusionary zoning.” But prior to passage of the Civil Rights Act of 1968, some municipalities had race-based exclusionary land-use regulations. Early in the 20th century, several California cities masked their racist intent by specifically excluding laundry businesses, predominantly Chinese owned, from certain areas of the cities.

Today, of course, explicitly race-based, exclusionary zoning policies are illegal. But some zoning regulations nevertheless price certain demographics out of particular neighborhoods by forbidding multifamily dwellings, which are more affordable to low- or middle-income individuals. When the government artificially separates land uses and forbids building certain kinds of residences in entire districts, it restricts the supply of housing and increases the cost of the land, and the price of housing reflects those restrictions.

Moreover, when cities implement zoning rules that make it difficult to secure permits to build new housing, land that is already developed becomes more valuable because you no longer need a permit. The demand for such developed land is therefore artificially higher, and that again raises its price.

Minimum lot sizes

Other things equal, the larger the lot, the more you’ll pay for it. Regulations that specify minimum lot sizes — that say you can’t build on land smaller than that minimum — increase prices. Regulations that forbid building more units on a given-size lot have the same effect: they restrict supply and make housing more expensive.

People who already live there may only want to preserve their lifestyle. But whether they intend to or not (and many certainly do so intend) the effect of these regulations is to exclude lower-income families. Where do they go? Where they aren’t excluded — usually poorer neighborhoods. But that increases the demand for housing in poorer neighborhoods, where prices will tend to be higher than they would have been.

And it’s not just middle-class families that do this. Very wealthy residents of exclusive neighborhoods and districts also have an incentive to support limits on construction in order to maintain their preferred lifestyle and to keep out the upper-middle-class hoi polloi. Again, the latter then go elsewhere, very often to lower-income neighborhoods — Williamsburg in Brooklyn is a recent example — where they buy more-affordable housing and drive up prices. Those who complain about well-off people moving into poor neighborhoods — a phenomenon known as “gentrification” — may very well have minimum-lot-size and maximum-density regulations to thank.

When government has the authority to restrict building and development, established residents of all income levels will use that power to protect their wealth.

Parking requirements

Another land-use regulation that makes space more expensive is municipal requirements that establish a minimum number of parking spaces per housing unit.

According Donald Shoup’s analysis, parking requirements add significantly to the cost of housing, particularly in areas with high land values. For example, in Los Angeles, parking requirements can add $104,000 to the cost of each apartment. Parking requirements limit consumers’ choices and increase the cost of housing even for those who prefer not to pay for parking.

Developers typically build only the minimum amount of parking required by law, which indicates that those requirements are binding. That is, in a less-regulated environment, developers would devote less land to parking and more land to living space. A greater supply of living space will, other things equal, lower the cost of housing.

Smart-growth regulations

In the 1970s, municipalities enacted new rules that were designed to protect farmland and to preserve green space surrounding rapidly growing cities by forbidding private development in those areas. By the late 1990s, this practice evolved into a land-use strategy called “smart growth.” (Here’s a video I did about smart growth.) While some of these initiatives may have preserved green space that can be seen, what is harder to see is the resulting supply restriction and higher cost of housing.

Again, the lower the supply of housing, other things equal, the higher real-estate prices will be. Those who now can’t afford to buy will often rent smaller apartments in less-desirable areas, which typically have less influence on the political process. Locally elected officials tend to be more responsive to the interests of current residents who own property, vote, and pay taxes, and less responsive to renters, who are more likely to be transients and nonvoters. That, in turn, makes it easier to implement policies that use regulation to discriminate against people living on low incomes.

Conclusion

Zoning, minimum lot sizes, minimum parking requirements, and smart-growth regulations demonstrably and significantly increase the cost of housing for everyone by raising construction costs and restricting the supply of housing.

The average household in the United States today, rich or poor, spends about a third of its income on housing. But higher home prices hit lower-income households disproportionately hard because a dollar increase in housing expenditure represents a larger percentage of a poorer household’s budget. Indeed, the bottom 20 percent of households spends around 40 percent of income on housing.

In other words, these land-use regulations are unfairly regressive. Relaxing or even removing them would be a step toward achieving greater equity.

Sanford Ikeda is a Professor and the Coordinator of the Economics Program at Purchase College of the State University of New York and a Visiting Scholar and Research Associate at New York University. He is a member of the FEE Faculty Network.